Price of 2.5 times revenue makes this a high price for a clinical laboratory
Monday, Laboratory Corporation of America (NYSE: LH) agreed to purchase Genzyme Genetics Corp’s. (NASDAQ: GENZ) fetal genetics and oncology testing division for $925 million in cash. Genzyme has shopped its neo-natal genetic testing business since last year.
LabCorp is paying a purchase price that is 2.5 times Genzyme’s $371 million in annual revenue. This is one of the highest prices paid for a clinical pathology laboratory company since Quest Diagnostics Incorporated (NYSE: DGX), paid about 2.5 times revenue for Ameripath, Inc. in March 2007. In that transaction, Quest Diagnostics paid about $2 billion for Ameripath, which had annual revenues approaching $800 million at the time of sale.
In purchasing Genzyme’s genetic testing business, what did LabCorp get? The genetic testing division at Genzyme is comprised of 70% pre-natal genetic tests and 30% hematology/oncology tests. Both lines of testing are growing at double-digit rates, which is one reason what this business unit was considered a prime laboratory testing asset.
David P. King, Chairman and Chief Executive Officer of LabCorp stated that the acquisition “will substantially expand our capabilities in reproductive, genetic, [and] hematology-oncology” testing. The reason King emphasizes these lines of testing is that he wants to increase both the proportion and volume of esoteric and molecular testing performed by his clinical laboratory company.
Some Wall Street analysts have called attention to the rather high price that LabCorp paid for the Genzyme genetic testing business, while also pointing out that LabCorp may be challenged to fully capitalize on its purchase. For example, Kemp Doliver, Managing Director of Avondale Partners, LLC, wrote that, “The acquisition is somewhat reminiscent of Quest Diagnostics’ purchase of AmeriPath in 2007 (which also sold for 2.5x revenue). AmeriPath’s results have been disappointing as a result of additional IT investment, disappointing cross-selling results, and in-sourcing by oncology practices. The Genzyme Genetics deal possesses many of the same risks [for LabCorp], but with a few differences.”
Why was Genzyme Corp. interested in divesting a profitable, fast-growing, and highly respected genetic testing business? The simple answer is that Genzyme experienced manufacturing problems that affected the quality of three of its most profitable prescription drugs. The company has entered into a consent decree with the FDA that included a $175 million fine. Genzyme is divesting three different business divisions in order to focus on its core business. It is expected to use the proceeds from these sales to buy back as much as $2 billion of its stock.
For the laboratory testing industry at large, the main consequence of LabCorp’s acquisition of the Genzyme genetic testing business is that a big lab company will get even bigger. The acquisition continues the trend of consolidation that has continually concentrated market share in the hands of the nation’s largest laboratory companies over the past two decades.
Also, once again, LabCorp has apparently been willing to outbid Quest Diagnostics for a major clinical laboratory acquisition. Over the past 30 months, LabCorp has proven to be the winning bidder for the handful of larger clinical laboratory properties that have come to market. These include DSI Laboratories of Fort Myers, Florida; Pathologists Associated Labs, Muncie, Indiana; and Centrex Clinical Laboratories, New Hartford, New York.